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Builders Fear Slower Housing Market as Tax Credit Fades
In an ongoing series of NAHB media teleconferences being held around the country to increase public awareness of the need for Congress to move quickly on stimulating housing and the nation’s economy, home builders last week indicated that their home sales are beginning to trail downward in the face of the Nov. 30 closing deadline for the first-time home buyer tax credit.
The tax credit has become increasingly popular among younger members of the home-buying public, who have been providing testimonials on its importance in their decisions to become home owners at a time of affordable prices and interest rates. As the final weeks for using the credit wind down, traffic has remained brisk at NAHB’s Web site, www.FederalHousingTaxCredit.com, which contains links to more information on the credit on Facebook, Twitter and YouTube.
“The only thing we’ve been getting any traction on so far this year has been this tax credit,” said Tom Walker, of Gateway Homes, a medium-sized builder in Houston.
“Our sales have been sustainable — 20 in June and July — and the main reason is because we could start those houses and have them finished by the Nov. 30 deadline,” Walker said. “But in August, we had to cut that off and went to seven sales because we can no longer tell our buyers we can start that house in time to meet the deadline.”
Of the roughly 150 homes his company has sold this year, 100 of those sales can be attributed to the availability of the $8,000 tax credit, he said.
Wes Peoples, of WP Investments in Austin, Texas, and the immediate past president of the Home Builders Association of Greater Austin, noted that the tax credit was responsible for generating hundreds of housing starts this summer as builders worked to beat the clock and have homes available so that prospective first-time buyers could buy them in time to receive the tax credit.
Housing activity has been down about 46% in the local market from its peak in 2006, Peoples said, "and the tax credit has been a huge boon to our business. When somebody buys a house, they buy appliances, furniture, yard maintenance equipment; it has a huge multiplier effect for the economy.”
‘Revive Housing, Restore America’
As part of a grassroots “Revive Housing, Restore America” campaign that began last month, builders have been urging their members of Congress to extend the tax credit for an additional year and expand it to all primary-home buyers with qualifying incomes, not just first-timers. Despite small but steady gains in recent months in single-family home sales and starts, builders are concerned that an additional push is needed to ensure a full-scale recovery in housing and the creation of jobs at a time when the U.S. employment rate is climbing and expected to surpass the 10% threshold.
“The good news is being driven at the lower end of the marketplace by first-time buyers or investors,” said NAHB Chief Economist David Crowe. “But we are very concerned that the euphoria — the extra boost that has occurred in the marketplace — will start to disappear when the credit expires in November.”
Crowe indicated that the housing industry needs more momentum “and a steam-building process to get the ball rolling.” If the credit is not extended and expanded, he worried that the fast-approaching end of the credit will start being reflected in housing starts and sales numbers for as early as last month. “Housing has not made the leap forward that everyone had hoped for by now.”
Also in dire need of fixing is the appraisal process, which according to NAHB surveys is scuttling 25% of new-home sales with valuations coming in below the contract selling price because short sales and homes in foreclosure are being incorrectly used as comparables.
The flow of credit to home builders to finish viable housing projects or to commence new ones has slowed to a trickle, Crowe added, and needs to be restored to enable housing to move forward and provide support to the economy, which also appears to be entering into a fragile and tenuous state of recovery following last autumn’s financial market collapse and the worst slump since World War II.
In meetings and a slew of correspondence and calls to their U.S. senators and representatives, builders have been spreading the word that the crises in appraisals and acquisition, development and construction (AD&C) lending are due for major repairs before the health of the housing industry can be restored.
To help building companies survive the downturn, builders are also asking Congress to expand the federal tax code’s Net Operating Loss (NOL) carryback provision for businesses.
Tax Credit Window Closing
With less than three months to go on the current tax credit, builders report that it is becoming increasingly difficult for prospective first-time home buying households to squeeze through the window of opportunity and find properties on which they can successfully close by Nov 30. The scramble is now on for existing properties or new homes that have already been built, and it is virtually too late to break ground on new housing.
Early indications are that the tax credit has begun to have a dampening effect as it fades away, and other teleconference participants reported slowing conditions in the last several weeks of summer.
Jeff Click, president of Jeff Click Homes in Edmond, Okla., and president of the Central Oklahoma Home Builders Association, said that he had observed a spike in housing production in his market in July but then a decline in August. With new homes taking four to six months to be completed, “the window of opportunity for the credit has now closed,” he said.
In Montana, builders said that the tax credit has produced “a considerable uptick” in the market, but the incentive hadn’t really gained traction until fairly recently.
“We didn’t see, here in Helena, the tax credit take hold with the buying public until the first part of July,” said Mike Hughes of Mike Hughes Construction. “We certainly hope we are able to convince our Congress how critical it is we keep this momentum moving to pull us out of this recession.”
Greg McCall of McCall Development in Billings said that he had retooled his company to build less expensive homes at the same time as Congress passed the tax credit. “With that, we saw a huge surge in sales we hadn’t anticipated,” he said.
McCall reported that the credit was used in 16 of the 30 new homes he has sold this year. “Without that, we would have been virtually dead in the water,” McCall said.
The Commerce Department may provide some insight into the impact of the expiring tax credit nationwide when housing starts statistics for August are released this Thursday, Sept. 17.
Appraisal Horror Stories
On the appraisal front, teleconference participants reported a number of horror stories in which low-ball assessments had impeded new home sales.
In Oklahoma City, Click said that builders are starting to see lost sales opportunities as the result of new regulatory restrictions on appraisals. “Stories of closings that didn’t happen because of appraisal issues” abound, he said. “Builders are doing the best to make ends meet, but if you get stuck with a house that you can’t sell, that can be the final straw.”
In Houston, Walker said that one of his FHA homes — priced at $125,000, down from $135,000 — was appraised $17,000 low after a management company assigned an appraiser from Plano in the northern part of Texas. The appraiser used comparables from up to four miles away and also included foreclosures. As a result, Walker said he is having to “sit on the house for six months before the FHA will allow a new appraisal." In the meantime, the windows have been “busted out” and the home vandalized to the tune of $5,000 in damages.
In Austin, Peoples cited an appraiser calling from California to ask if a master-planned community of 5,000 homes had paved roads and sewers; the appraisal came in $100,000 low.
Bill Garrett, president of W.B. Garrett Inc. in Richmond, Va., complained of an appraisal on a home coming in recently too low to justify the price in the sales contract. The appraiser did not use as a comparable a similar home in the neighborhood that had closed within 30 days of the appraisal at a higher-per-square-foot cost than the sales price of the undervalued property.
Creating Jobs
Builders speaking at the teleconferences also emphasized the importance of adopting the four-pronged “Revive Housing, Restore America” initiative in order to spur job creation in their own businesses and throughout the economy in order to brighten an otherwise dim outlook for employment even if the economy succeeds in moving to higher ground.
Garrett, whose company has focused on currently hard-to-sell homes in the $500,000 to $1 million price range, has whittled his crew down to himself and two employees, both of whom have now been cut back to a four-day weekly work schedule.
Tom Farasy, president of Terra Verde Communities in Burtonsville, Md., and president of the Maryland National Capital Building Industry Association, said that the 24 member companies on the association’s board at its meeting this February reported laying off some 1,700 employees in the previous 12 months. A study by his group has found that each new home built generates 4.1 new jobs.
In a preliminary survey, Farasy’s board members were asked how many new workers they had hired in the last 30 days and how many they intended to hire within the next 30 to 90 days. The answer was zero. “Nobody has indicated that they are hiring,” he said. “Until jobs return to the marketplace, we will not really have a recovery.”
Research by economists at NAHB has found that extending the $8,000 tax credit and making it available to all income-eligible buyers would spur 383,000 additional homes sales — including 80,000 housing starts — and create nearly 350,000 jobs and an additional $16 billion in wages and salaries over the coming year. Approximately one-third of those jobs would be in the construction sector. Small business income would increase by $6.5 billion, while corporate profits would increase by $5.5 billion.
For a related story in the Sept. 7 issue of NBN on the impact of the tax credit extension, click here. For a story on the economic impact of addressing appraisals and AD&C lending and expanding the NOL carryback period, click here.
Recovering Lost Ground
Builders also stressed that they have considerable ground to recover before they will be back to business as usual.
“Growing up in the building business, you always know it is a cyclical business with highs and lows, but no one expected the apocalyptic events of the past two years, which have been even worse than the early ’80s when interest rates were up to 18%,” said J.D. Stricklen, president of Stricklen Properties in Charleston, W.Va., which was started by his father in 1953.
In his market, households who are transferring to the area are renting homes, he said, because “they can’t sell the house they have in another city.” A weak economy and the loss of household income in 401(k)’s and other investments, aren’t helping, he said. “People are scared to death.”
“We are trying to convey what has happened in the marketplace,” said Stricklen. “It’s the quality of life for the citizens of this country. The housing stock is getting old in the Appalachian region. People are living in houses that should not be occupied in terms of energy-efficiency and human safety.”
Joining the Campaign
With Congress back in session and focused on health-care reform, NAHB is encouraging its members to visit, call, write and e-mail their U.S. senators and representatives.
“Our job is to keep sounding the call for housing in order to be ready for when lawmakers start working on new tax legislation this fall,” said NAHB Chairman Joe Robson.
To get involved, NAHB members should visit www.nahb.org/ReviveHousingNow. This one-stop site contains information on calling or e-mailing members of Congress, talking points, banners for Web pages, print ads, op-ed letters that HBA presidents can send to their local newspapers, and more.
Members of the general public can go to www.revivehousingnow.com, where they will find information on contacting their lawmakers and asking them to extend the home buyer tax credit.
For more information on the campaign, e-mail Molly Murray at NAHB, or call her at 800-368-5242 x8282.
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